First Reference company logo

Inside Internal Controls

News and discussion on implementing risk management

machine cogs image

Employee forfeits $115,000.00 in bonuses by resigning; active employment clause valid

bonusesA bonus policy may state that employees who are eligible for bonuses must also be actively employed to receive their bonus payments. That is, employers may institute an “active employment clause”. Courts will uphold valid active employment clauses, as demonstrated by Bois v. MD Physician Services Inc., 2017 ONCA 857 (CanLII).

MD Physician Services Inc. (“MD Physician”) awarded Mark Bois bonuses under its Variable Incentive Plan (“VIP”) in 2009 and 2010. Bonuses are paid in three equal instalments in the three years following the calendar year in which MD Physician awarded the bonus.

Under the VIP, any employee who leaves, or gives notice to leave the organization on or before the bonus payout date was ineligible to receive a bonus payment. Mr. Bois and MD Physician signed a letter to this effect.

Mr. Bois resigned before MD Physician paid out the final instalment of the 2009 bonus and the last 2 instalments of the 2010 bonus. These remaining instalments totalled $114,916.79, and Mr. Bois sued to recover this amount.

Mr. Bois relied in part on s.11(5) of Ontario’s Employment Standards Act (ESA), which requires that an employer pays out wages to which an employee is entitled, no later than the later of the employee’s normal pay date and 7 days after employment ends. He also relied on section 13(1), which states that an employer shall not withhold wages payable to an employee.

The Ontario Court of Appeal upheld a lower court’s ruling that Mr. Bois had to be actively employed to receive bonus instalments, and he knew or ought to have known that by resigning he forfeited his entitlement to further bonus payouts. His resignation extinguished rights to future bonus instalments, such that s.11(5) of the ESA did not apply.

The Court concluded that it is open to parties to decide how and when bonuses are declared, earned and accrued, and payable.

The Court of Appeal of Alberta reached a similar decision regarding an active employment clause in Styles v Alberta Investment Management Corporation, 2017 ABCA 1 (CanLII).

Takeaways

Active employment clauses should be clearly worded so that an employee knows, or ought to know, that active employment is a pre-requisite for bonus payouts.

Define what active employment or terminated employment means. For example, as explained in Paquette v. TeraGo Networks Inc., 2016 ONCA 618 (CanLII), the Ontario Court of Appeal has found the following definition of terminated employment effective in limiting participation in a stock option program during the reasonable notice period:

“Termination of employment” was defined as the date the employee “ceases to perform services for” the employer “without regard to whether the employee continues thereafter to receive any compensatory payments therefrom or is paid salary thereby in lieu of notice of termination.”

Like the loss of entitlement to bonus payouts, the loss of the right to exercise stock options during the notice period may be compensable in wrongful dismissal actions. Stock option cases have required clear language to limit the right to exercise stock options upon termination. Similar reasoning applies to bonus entitlement disputes.

Apolone Gentles, JD, CPA,CGA, FCCA, Bsc (Hons)

Apolone Gentles is a CPA,CGA and Ontario lawyer and editor with over 20 years of business experience. She has held senior leadership roles in non-profit organizations, leading finance, human resources, information technology and facilities teams. She has also held senior roles in audit and assurance services at a “Big Four” audit firm. Apolone has also lectured in Auditing, Economics and Business at post-secondary schools. Read more here
Send to Kindle

, , , , , ,

Leave a Reply

Your email address will not be published. Required fields are marked *

Time limit is exhausted. Please reload CAPTCHA.